Can asset recycling end privatisation premier-slaying?

Privatisation is not always great for political careers, claiming scalps like Morris Iemma and now Campbell Newman, but former departmental chiefs say there’s no reason for public servants to hesitate putting forward asset recycling ideas.

Competition — not ownership — is how the public interest is protected, a parliamentary inquiry heard this week, just days before the ACT government signed an asset recycling deal with the Commonwealth, and the New South Wales election campaign began with a pitch to privatise electricity.

Michael Keating

Asset recycling makes good economic sense, says one former head of Department of Prime Minister and Cabinet and Department of Finance who oversaw the major asset sale program of the Hawke-Keating years.

“It’s the sort of thing that any sensible government, like any sensible business should do,” Michael Keating told The Mandarin. “It should look at its asset portfolio and see whether there are lazy assets that would be better sold off so you can buy better new assets that are less lazy.”

Politicians dream up some of the big sales — the Commonwealth Bank, Qantas, Telstra, et al — but aren’t generally familiar with every parcel of assets the government own. Most of the smaller asset sales like the Tokyo embassy or Defence home loan portfolio were devised by public servants like Dr Keating.

Safeguarding the public interest during these sales was also left largely to public servants devising the program. Competition and regulation both have a place, Keating said, depending on how much money you need to raise and the available levers to regulate that industry.

Telecommunications and banking were good ideas because there already was competition, or it could be opened up to competition. Monopolies like electricity were better suited to regulation, but only if there was something to regulate, Keating said. “Where a utility has a monopoly and it’s sold, the normal practice is to introduce regulation. If you regulate the cost of electricity transmission, which is also a monopoly, you’ve got some obvious indicators of how to regulate it; you know what they cost in terms of wires and you can regulate on the replacement cost, he said.

Bad ideas also get put forward by public servants, Keating says, like the proposed sale of the Commonwealth’s Treasury building — it’s likely to be leased back to government agencies but with added uncertainty.

“You could ask yourself: what would regulation achieve in the market in the parliamentary triangle for the Treasury building? How would you safeguard the public interest where the only possible tenant is the public? There’s no market in Treasury buildings and no standard to regulate against. You’ve created a great deal of uncertainty about establishing the price and whether in the long run you’ll pay a great deal more than you should if you’d kept the ownership,” he said.

“If you can sell the Treasury building, why not sell Parliament House? Because you’ll never allow anyone else to move into it, maybe you shouldn’t sell it.

“Any time you do an asset sale, that’s what you’re trying to do, work out what return you’ll get if you keep it, relative to what you’ll get if you use the money to do something else. That’s the sort of calculation you’re making. And in this case it’s not obvious that you’ll do well out of it. There are regulations where you’d have to be suspicious about whether it will work, precisely because there’s no market standard.”

Where possible, industry competition simplifies the equation. “The honest way to do it is to introduce competition first, then make the sale afterwards. But if you introduce competition you’ll reduce the sale price because a monopoly is going to make more profits than a competitive enterprise,” Keating explained.

“If you want to promote efficiency, you’ll get much more efficiency out of competition than you will just by changing ownership. All the evidence of history says competition matters more than ownership if you want to improve efficiency.”

The carrot of asset recycling

The ACT government’s take-up of the Asset Recycling Fund program was officially signed yesterday, gaining $60 billion in Commonwealth funds for the Capital Metro light-rail project in exchange for the sale of $400 million in territory assets. It was perhaps the most inevitable and the most shrewd deal they could make, as the lack of other state takers meant the ACT was able to push the Capital Metro as the sole project, even though the Abbott government had little political desire to fund that project which lacks bipartisan support in the territory. Federal Treasurer Joe Hockey took a swipe, saying:

“While the project was considered to meet the criteria of the initiative, the Commonwealth is aware that there has been debate as to whether alternative projects may have higher economic benefits.”

Electricity privatisation is back on the agenda in NSW also, after ending the career of Iemma. Premier Mike Baird received a boost of support from Iemma who said there was “no magic pudding” to fund infrastructure.

The Australian Competition and Consumer Commission weighed in on Wednesday at the Senate inquiry into the appropriateness of the Commonwealth’s 15% assistance to states and territories that agree to reinvest profits from asset sales into further infrastructure. Michael Cosgrave, executive general manager of the ACCC’s infrastructure regulation division, said there wasn’t an ideological issue in the public interest test:

“Before you privatise, which is an entirely separate question, ensure you’ve appropriate regulatory arrangements, either a regulated monopoly or in the event that there are contestable elements, to break a business up.”

Treasury’s Chris Legg, chief adviser in the industries and infrastructure division, said there was no tax advantage or disadvantage for assets to remain in state hands, as the Australian Tax Office imposed an equivalent payment “consistent with ensuring competitive neutrality with a similar entity that is not owned by the state. That payment is then made to the state coffers.” That rate, determined by the ATO, remains confidential.

Public servants worried about having their public interest checks abandoned at the last minute for a boondoggle will have one less reason to be concerned: Legg warned that states and territories that try to switch projects after taking Commonwealth funds were in for a nasty surprise, as they would likely find their other grants or GST garnished.

Meredith Sussex, former Victorian Cabinet Office head and co-ordinator of planning under Steve Bracks, told The Mandarin public ownership in Australia is a product of our history, not necessarily of logical imperative, but governments still need to be respectful of the cultural attachment created by the history of public ownership.

“As Governor of Ohio in the 1990s, George Voinovich privatised just about everything he could. I once asked his chief of staff which privatisation they were proudest of. He did not hesitate: ‘We managed to privatise half of the liquor outlets.’ He was gobsmacked that we run our liquor outlets by regulation of the private sector and no public ownership at all,” she said.

Sussex says her experience is that premiers and ministers want to hear about the full range of ideas which will free up funds while retaining or enhancing required service levels. But recent events may have added a level of caution.

“Of course, senior public servants need to be careful,” she said. “It is not wise to extol proposals which have been explicitly ruled out by the government of the day — although these proposals can always be noted. Public service executives also need to be careful of the potential for FOI disclosure or leaking of sensitive advice which could embarrass the minister and kill the proposal before it has a chance to be considered.

“Senior public servants also have a clear role in advising on ways to address potential public concern about a particular asset sale or a privatisation. Hypothecation of the proceeds to a high community priority is always worth considering — if Treasury allows it.”

Harley Dennett is editor at The Mandarin based in Canberra. He's held communications roles in the New South Wales public sector and Defence, and been a staff reporter for newspapers in Sydney and Washington DC.

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